Sunday, September 6, 2015

The minimum wage in Korea has been set at 6,030 won ($5.30) for
next year after weeks of debate, although the labor unions boycotted the
government-led talks on the final day.
Labor union
representatives walked out of a meeting of the Minimum Wage Council ― a
trilateral committee of employers, employees and labor market experts to
set the minimum wage through discussion ― on Wednesday. They were upset
with the suggestion that there should be a cap on the increase in the
minimum wage. However, the council went ahead and finalized an increase
on the following day.

The
Minimum Wage Act stipulates that at least one-third of all
representatives on the council can decide on the rate if any party
refuses to attend the negotiations more than once.
The new rate will be notified by the government on Aug. 5 after taking into consideration all objections to the finalized rate.
In
Korea, the minimum wage is the lowest allowable gross wage per hour,
regardless of employment status or nationality. There are some
exceptions to this rule: Businesses that only employ family members or
relatives living in the same residence; domestic service users; and
seamen who are governed by the seamen act.
The unions initially
demanded a 79 percent rise from the current minimum hourly wage of 5,580
won to 10,000 won, while employers ― represented by the Korea Employers
Federation ― were pushing for a freeze. The unions lowered their demand
to 8,100 won, and refused to budge from this stance, despite opposition
from others on the council.
The minimum wage in Korea was raised
by 7.1 percent this year from 5,210 won in 2014 ― it was 600 won in
1989 when the government formed the wage council. The latest hike,
therefore, marks an 8.1 percent hike.
For comparison purposes, the minimum wage in the United States is $7.50, Japan $6.40 and the U.K. $10.
The
KEF argues that the minimum wage has risen too rapidly and needs to be
stabilized, voicing concerns over possible job losses and soaring
production costs. On the other hand, the unions maintain that a hike
would curb the nation’s income inequality and boost consumer spending.
So, who among them is right?
At
face value, the logic of the unions seems right, as minimum wages
protect workers from exploitation by employers and reduce poverty. Legal
minimum wages are a government’s most direct policy lever for
influencing wage levels, especially for workers with a weak bargaining
position.
They also serve as a basic labor standard, alongside
working-hours regulations and related provisions to ensure basic
job-quality standards. And supporting low-wage earners is widely seen as
important for promoting inclusive growth.
However, many
economists do not think so. They believe that minimum wage laws cause
unnecessary hardship for the very people they are supposed to help.

The
argument is that while the law can set wages, it cannot guarantee jobs.
The experience in most countries with a minimum wage law is that
low-skilled workers are often priced out of the labor market. This is
because employers typically are not willing to pay a worker more than
the value of the additional product that he or she produces.
In
fact, there are numerous studies using aggregate time-series data from a
variety of countries that have found that minimum wage laws reduce
employment.
If employers consider the wage floor too high,
Workers whose productivity is valued less than the mandated wage will
find jobs only in occupations not covered by the law or with employers
willing to break it.
In Korea, we already have seen many highly
publicized cases in recent months where nonregular and part-time workers
were paid below the mandated wages until a public outcry made them
reconsider.
In addition to making jobs hard to find, minimum wage
laws may also harm workers by changing how they are compensated by
cutting fringe benefits which are an important part of the total
compensation package for many low-wage workers.
Studies have also
found that the minimum wage increases generally redistribute income
among low-income families rather than moving it from those with high
incomes to those with low incomes.
As the Organization for
Economic Cooperation and Development has noted in a recent policy brief,
minimum wages are common but controversial. Currently, 26 out of 34
OECD countries have statutory minimum wages.
“Views differ about
whether such support is best provided through minimum wages, or closely
related policies, such as government transfers,” it noted.
In
recent years, policymakers in many countries have adjusted minimum wages
in the context of high and increasingly persistent unemployment,
stagnant or even declining average wages and, frequently, falling
incomes especially among the poorest families.
“While minimum
wages are intended to support low-wage workers, the cost of employing
them can be at the heart of concerns that legal minimum might reduce
employment, or damage the international competitiveness of domestic
firms relying on low-skilled labor,” the brief noted
Further, tax burdens too have to be taken into account.

Even
at the very bottom of the wage ladder, taxes and social levies can
strongly reduce take-home pay. At the same time, taxes and other
mandatory nonwage labor costs also push up the cost of employing
minimum-wage workers.
By having an impact on labor costs and
workers’ take-home pay, the overall tax burden has implications for how
well minimum wages perform at supporting low-wage workers, while
avoiding significant job losses.
Given the overwhelming evidence
in numerous economic studies, the Korean trade unions should have
softened their stringent position and worked out an increase to their
satisfaction. By boycotting the talks, they did not do justice to young
people and low-skilled workers.
While it is impractical to do
away with the minimum wage, given the social realities in Korea, the
government should also step in and ease the concerns of businesses.
Some
countries have adopted specific measures to reduce the gap between the
amounts an employer pays and the take-home pay that the worker receives.
To lower employers’ costs, or to reduce risks of employment losses
following minimum hikes, some have introduced tax rebates for firms
employing minimum wage workers ― something the Korean government should
consider.
More importantly, there needs to be efficient
coordination between minimum wage policies and other redistribution
measures by the government, notably taxes and transfers ― that are
lacking in Korea.
These small steps could go a long way in
protecting the interests of businesses as well as ordinary workers,
given that the economy is struggling to recover and unemployment
continues to be a major concern.